In 2013, Mozambique backed an $850m bond for a tuna fishing company. Now, as the company looks likely to default, questions are being asked about where the money went.
Over the last few years, several African governments have flocked to international bond markets in the hope of raising finances to boost economies and build costly infrastructure. In 2013, Mozambique joined this spree, helping raise an impressive $850m for a new tuna fishing company.
But two years later, the fishy deal has taken a serious plunge for the worse. The company is likely to default on its first payment following a $25m loss in 2014. Revelations suggest that most of its money was spent on defence, rather than fishing equipment. And high-level government officials, including former president Armando Guebuza, have been accused of involvement in what the opposition has called “the greatest financial scandal since independence”.
Now, this questionable deal – spreading from the shimmering towers of a Swiss bank to the warm waters of the Indian Ocean – will have to be restructured and the details around it clarified if it is to win back credibility with international investors.
A financial haul
In September 2013, Credit Suisse raised $500m for a newly created state-owned tuna-fishing company called Empresa Mocambicana de Atum (EMATUM).
Given promises of a state guarantee and a handsome yield of 8.5%, the issue was oversubscribed and Russian bank VTB raised a further $350m. Though some had doubts all the money would end up paying for fishing boats, information given to investors suggested Mozambique had the potential to be a booming tuna hub.
Sources in Maputo, however, told African Business that a feasibility study grossly overestimated the country’s tuna potential. The bond was sold with estimates that Mozambique was currently catching 200,000 tonnes of tuna a year worth $200m. Yet the national fisheries office reported that in 2013, foreign and national vessels caught just 6,000 tonnes of tuna.
“Some of the estimates were based on selling tuna at over $10,000 a tonne – that is first-grade Japanese sashimi tuna,” says a Maputo-based fisheries specialist.
A government source added that, on inspection, Japanese buyers were not convinced Mozambique’s new fishing infrastructure could keep the tuna refrigerated at the sub-zero temperatures required.
Bonds are attractive for emerging markets as they have fewer strings attached compared to loans from multilateral partners such as the IMF. They also offer an opportunity to finance development needs – such as infrastructure, education and health – through private sector capital. The tuna-fishing EMATUM, however, seemed an unusual project to finance through international bonds from the start.
To begin with, it was established just weeks before the $850m was raised in its name. The company had not even declared its board of directors or established premises before the bond sale.
Furthermore, investors were told the funds were state-guaranteed even though it breached the $6m annual ceiling on state guarantees authorised by Mozambique’s budget law.
“At the time, it was considered a very opaque and sketchy issuance. It very much took the multilaterals by surprise,” says Mark Rosenberg, Africa Director at Eurasia Group. “The basic commercial viability of the tuna fishing operation was unclear as was the motivation for this issuance and the government’s part in this.”
In the same month the bond was issued, then-President Guebuza paid a visit to France-based ship building company, Constructions Mecaniques de Normandie (CMN), with French president François Hollande, sealing a multimillion-dollar deal. Under the agreement, CMN, which specialises in military vessels, would supply two dozen fishing boats and six patrol boats for about $220m, according to the French Foreign Trade Ministry.
But peculiarly to observers, the order included three Ocean Eagle 43 trimaran boats that can launch unmanned drones and be equipped with artillery cannon and heavy calibre machine guns. Ship experts say the money spent on the boats is remarkably high.
Furthermore, only five of the fishing boats delivered have been granted licences by the fisheries ministry. The rest are lacking basic communications and safety features, according to a senior government source.
Investors buying the bonds claim the company prospectus said EMATUM would use the funds for “fishing infrastructure”, not to procure weapons. Credit Suisse told Bloomberg in 2014 that, “there are no weapons or combat systems of any kind” on any vessels being built under the EMATUM contract.
“EMATUM is not an example of good practice. It was universally recognised as being fairly non-transparent,” says an economist from a donor country who asked to remain anonymous. “It is difficult to know what Credit Suisse did in that context versus what was the responsibility of the borrower.”
Appeals to Credit Suisse by G19, a group of donors, to provide a breakdown of how the tuna bond was to be allocated were refused, say insiders. But cumulative pressure from aid partners pressed the company to publish its accounts. “It was a step towards transparency but the report is still flawed,” says the economist.
The records revealed that $350m of the money raised was initially allocated to defence, but in May, this was increased to $500m. G19 expressed its concern about lack of transparency despite the fact several donor countries are involved in contracts to provide military equipment paid for with money raised under the EMATUM banner.
Mozambique’s political opposition has called for the arrest of Guebuza, who they say used the tuna fleet as a smokescreen for security deals that would allow him and other ruling party elites to make vast profits from protecting offshore gas rigs. Some say Guebuza may have also used some of the funds to buy political support for last year’s elections, ensuring the ruling party, Frelimo, maintained its grip on the country.
Without a detailed breakdown of the costs, speculation that the money has been spent illegitimately will continue to haunt the government.
The bond, due to be repaid in full by 2020, will stand at $980m when Mozambique is due to start repayments in September. Finance Minister Adriano Maleiane told parliament in June that EMATUM is likely to default on what he said was a bad deal in need of restructuring.
Members of ruling party Frelimo maintain that the company is viable, even though the fishing company filed a loss of $25m in 2014. Standard and Poor’s credit rating agency even downgraded Mozambique’s long-term rating, stating EMATUM’s financial difficulties “raise broader questions about Mozambique’s governance and public sector debt management”.
While Mozambique mulls its options, Maleiane has apparently reassured investors by pledging that the first instalment will be paid on time.
Economists believe Mozambique may swap the deal for a sovereign bond in order to regain credibility and a semblance of transparency. The government is likely to try to reduce the interest rate and extend the maturity.
Economists argue the current benchmark rate of 8.5% is high compared to other countries that issued bonds at around 6%. If the interest rate is reduced, investors will suffer a haircut. But it will be better for Mozambique in the long run, especially if it issues bonds again. If rating agencies class the swap as a default, the country may risk being downgraded further.
As well as the huge repayments, Mozambique’s damaged reputation on the back of the questionable deal also needs to be repaired. On this front, newly appointed President Filipe Nyusi has restored some confidence. Nyusi seems eager to rectify the mistakes of his predecessor, and in April, cancelled his attendance at an EMATUM promotion event. However, faith in Nyusi may be overstated – as defence minister at the time of the deal, Nyusi has also been implicated.
Mozambique’s expected windfall from huge untapped gas reserves could also assuage concerns. The IMF predicts Mozambique’s economy will grow 7% this year, rising to 8% between 2016–2019 as gas prospects boost construction and an estimated $40bn foreign direct investment arrives. In 2020, growth could jump to 17% when natural gas comes online too.
Newly introduced fiscal policies meanwhile should ensure Mozambique’s new-found wealth will not be squandered, and the introduction of a Fiscal Risk Analysis Unit should ensure that those like EMATUM do not see the light of day.
For the more robust investors, this rotten tuna bond is unlikely to rattle them. “These are the growing pains of emerging markets. Investors know there are huge gas reserves off the shores of Mozambique that will eventually bring in lots of foreign exchange, even if tuna does not,” says Rosenberg.
Mozambique’s bond provides a cautionary tale for its neighbours. A slump in much of the global economy ignited a strong appetite among investors hunting for higher yields in some of the world’s fastest growing markets allowing bond issuance to flourish. From Nigeria to Rwanda, and Zambia to Kenya, African countries rushed to bond markets, and according to the Overseas Development Institute (ODI), African bond issuance reached record highs in 2014, with the continent raising $6.25bn.
But there are risks involved. To attract international investors, the debt is issued in foreign currency – usually dollars or euros – leaving the debt exposed to currency risks whenever the value of the dollar or euro rallies. For example, falling prices for gold and cocoa, gaping budget deficits and escalating debt forced Ghana to reach an agreement with the IMF in February for a $1bn loan to help shore up its economy.
Acquiring debt is not necessarily a bad policy but it depends on how it is spent. Mozambique is learning a hard lesson. Reckless political spending, whether on public sector salaries, subsidies or military equipment, still has to be paid back.